When Nigel Morris expresses concern about the economy, it is wise to listen. As the co-founder of Capital One, Morris pioneered lending to subprime borrowers and built an empire by understanding the financial stress the average American can handle. Now, as an early investor in Klarna and other buy now, pay later companies like Aplazo in Mexico, he is observing a trend that makes him deeply uncomfortable. He stated that when people use these services to buy something as basic and fundamental as groceries, it is a clear indication that many are struggling.
Statistics support his unease. Buy now, pay later services have grown explosively, reaching 91.5 million users in the United States. According to survey data, twenty-five percent of users are now using these services to finance their groceries. These are not discretionary purchases like designer bags or the latest headphones, which were the original marketing focus for these services. Furthermore, borrowers are not repaying these loans reliably. Default rates are accelerating, with forty-two percent of users making at least one late payment in 2025, an increase from thirty-nine percent in 2024 and thirty-four percent in 2023.
This situation is more than a consumer finance story; it acts as a warning sign for the entire venture-backed fintech ecosystem and beyond. It echoes the conditions that preceded the 2008 mortgage crisis, with one critical difference: it is largely invisible. Because most buy now, pay later loans are not reported to credit bureaus, they create what regulators call phantom debt. This means other lenders cannot see if a person has taken out multiple loans across different platforms, leaving the credit system operating without full visibility.
Morris explained that a buy now, pay later provider who does not check or report to credit bureaus is oblivious to the fact that a customer may have taken out ten loans in a single week. The available data, while dated, is concerning. Consumer Financial Protection Bureau data from January showed that roughly sixty-three percent of borrowers had multiple simultaneous loans at some point during the year, and thirty-three percent took out loans from multiple lenders. The data also revealed that one-fifth of consumers with a credit record used a buy now, pay later loan in 2022. The borrower profile is also worrying, with nearly two-thirds having lower credit scores.
To be clear, buy now, pay later is not yet a systemic threat, as the total market is measured in hundreds of billions, not trillions. However, the lack of visibility into this debt, combined with its concentration among already-stressed borrowers, warrants careful observation. The economy is worse now for many subprime populations than it was three years ago, suggesting these numbers are likely higher today.
The reason for the lack of recent data is regulatory upheaval. The Biden administration attempted to treat these transactions like credit card purchases, bringing them under Truth in Lending Act protections. The Trump administration reversed this course, with the CFPB stating it would not prioritize enforcement of that rule and rescinding numerous interpretive rules. The agency said the regulations provided little benefit to consumers and placed a substantial burden on regulated entities.
Soon after, the CFPB released a new report with a surprisingly different message. Focusing only on first-time borrowers, the agency stated that customers with subprime or no credit repaid their loans ninety-eight percent of the time and found no evidence that access to these services causes debt stress. This optimistic picture contrasts sharply with the forty-two percent late payment rate, highlighting a significant data gap. We lack good visibility into what happens to borrowers over time, especially those managing multiple accounts.
The state of New York imposed licensing requirements on buy now, pay later companies to fill this void. However, state-by-state regulation creates a patchwork that sophisticated financial companies can easily navigate. When asked if he sees parallels to 2008, Morris was careful not to overstate the comparison. He acknowledged that delinquency and charge-offs are not rising yet, but pointed to storm clouds on the horizon, such as unemployment hitting 4.3 percent, its highest level in almost four years, and tumult around immigration, tariffs, and a recent government shutdown.
He also cited the end of the student loan payment moratorium, which he called the largest asset class outside of mortgage. Roughly 5.3 million borrowers are in default, with another 4.3 million in late-stage delinquency. Morris notes that the current situation is not yet a crisis, but the combination of phantom debt, rising unemployment, the end of student loan forbearance, and regulatory rollback creates conditions where problems could accelerate quickly.
The big concern is not the debt alone, but the cascading effects. The Federal Reserve Bank of Richmond has warned that the potential systemic risk comes from spillover effects onto other consumer credit products. Because these loans are typically smaller than credit card balances or auto loans, borrowers tend to prioritize keeping them current, meaning other, larger debts may default first.
Morris has lived on both sides of this equation. He revolutionized subprime lending at Capital One and now backs fintech startups. When asked where the line is between helping an underbanked population and enabling people to dig a hole for themselves, he wrestled with the question, emphasizing the importance of a moral compass in consumer lending. He described the mom test from his Capital One days: if you cannot unequivocally recommend a financial product to your mother, you should not be offering it to the American people.
Presumably, Morris would not place the companies he invested in this category. However, the current regulatory environment raises concerns. Because most of these companies do not report to credit bureaus, borrowers cannot use successful repayment to build their credit and access lower-cost loans. Morris stated that some companies do not want this to happen because they do not want their customers to graduate to better credit.
While these ethical questions are discussed, the problem is poised to grow. These services are bleeding into every corner of the financial system. Klarna operates as a licensed bank in Europe. Affirm has millions of debit cardholders who can finance purchases in physical stores. Both are integrated into Apple Pay and Google Pay. Established finance companies are also racing into this space, with PayPal processing thirty-three billion dollars in this spending in 2024. What began as a niche checkout option is becoming embedded financial infrastructure.
Morris sees this shift happening everywhere, with software companies predicting they will make more money from embedded finance than from their core software. He noted that these financing businesses often have the greatest longevity and market power.
The real danger may lie in what comes next: business-to-business buy now, pay later. The trade credit market represents 4.9 trillion dollars in payables among American firms alone, which is four times larger than the entire U.S. credit card market. When small businesses gain access to these services, their spending increases by an average of forty percent, which means more debt accumulating faster.
This debt is being packaged and sold at a pace that should alarm anyone who remembers 2008. Elliott Advisors purchased Klarna’s thirty-nine billion dollar British loan portfolio. KKR agreed to buy up to forty-four billion dollars in this debt from PayPal. Affirm had issued around twelve billion dollars in asset-backed securities. This follows the subprime mortgage playbook: slice up risky consumer debt, sell it to investors, and create layers of financial engineering that obscure the actual risk. This time, however, much of the underlying debt is not reported to credit bureaus.
We are potentially watching two bubbles, but only one is getting significant attention. The AI bubble has dominated headlines, with questions about massive data centers and high valuations. The buy now, pay later situation is different but no less worth watching. It is invisible, lightly regulated, and affecting the most vulnerable Americans, with people financing their meals in installments and graduates juggling student loans with multiple accounts.
The prosperity in certain sectors of the economy makes this problem easy to overlook. But when consumer debt becomes unsustainable, the resulting pain will be widespread, and venture capitalists and their businesses will be among those affected. As Morris watches his investments, he understands these warning signs better than most. He is not predicting a crash but urging vigilance. The question is whether regulators will act before it is too late.